Hospitals and physicians face an ongoing dilemma: How to devise business strategies for bringing the two together in beneficial ways, while also complying with legal constraints.

Make no mistake — the medical staff is the lifeblood of any hospital. This reality has led many hospitals to pursue transactions that align the financial and operational interests of the hospital and its medical staff. Such alignment efforts can take many forms, and new types of cooperative projects are frequently springing to life. Hospitals in competitive markets that fall behind in such alignment activities may find themselves at a serious disadvantage against other facilities. And even in smaller and sole-hospital markets, alignment efforts are often pursued in order to establish a more stable base of local providers.

Alignment efforts are driven by a variety of factors. The ongoing struggle for sufficient payments from Medicare and commercial payors is one. Another is that partnering with physicians can bring expertise and goodwill to certain ventures. Yet another is that alignment can result in the provision of better care at a lower cost while still paying sufficient dividends to the providers. At the same time, though, a variety of federal and state laws place limits on certain financial and other relationships between hospitals and physicians. For example, if specific physicians are targeted for investment in a venture, this may raise a red flag if the facts indicate the investment opportunity is a “reward” for past or future referrals.

Certain alignment strategies, such as “integrated delivery systems” and “ancillary joint ventures,” have been around for some time. Integrated delivery systems in many cases did not achieve their lofty goals, but a number of joint ventures have been quite successful. More recently, other alignment strategies have been developed or have risen in prominence. Several examples include:

Some alignment arrangements are clearly problematic. For example, the federal Office of Inspector General has cautioned against “contractual joint ventures” in which a hospital allows physicians to participate in a profitable service line already being provided by the hospital. For many alignment efforts, though, the legal risk resides in a more “gray” area. In other words, the risk lies somewhere on the spectrum between “no risk” and “significant risk.” Thus, it may be important for legal counsel to assess the degree of risk for a particular project and explain those ramifications to the parties involved.

Medical staff alignment is a reality that is here to stay, and further innovations in the field are sure to develop. But hospitals should pursue alignment efforts carefully and avoid falling into the realm of improper activities. This may require the parties to walk a very fine line under the guidance of legal and perhaps consultative assistance. But with such an approach, hospitals and physicians should continue to push further into the realm of aligning interests. In many cases, the factors at play in the healthcare industry leave hospitals and physicians with little choice to do otherwise.